[Economic Report of the President (2006)]
[Administration of George W. Bush]
[Online through the Government Printing Office, www.gpo.gov]

 
CHAPTER 8

The U.S. Agricultural Sector


In 2005, the Federal government spent approximately $20 billion on
agricultural support payments in a sector forecast to produce
approximately $270 billion of output in 2005. In addition, the
United States maintains barriers to the import of some commodities,
and these barriers raise the domestic prices of these commodities
relative to world prices. To what extent do these payments and
trade barriers serve a public purpose? Are they needed to maintain
a healthy U.S. agricultural sector? Could alternative policies
achieve this goal? This chapter addresses these and other
questions.
Today's agricultural commodity support programs are rooted in
the landmark New Deal legislation that followed the agricultural
depression of the 1920s and 1930s. These programs were designed to
sustain prices and incomes for producers of cotton, milk, wheat,
rice, corn, sugar, tobacco, peanuts, and other crops, at a time
when a large portion of the U.S. population was engaged in
farming. Changing economic conditions and trends in agriculture
since then suggest that many of the original motivations for farm
programs no longer apply. For example, the increasing reliance of
farm families on income earned from sources other than their farms
and a shift toward market-oriented farm policies have made farms
and commodity markets less vulnerable to adverse price changes
than before. These changes imply that moving away from traditional
commodity support programs today would have a much smaller impact
on farm household income than in previous decades. Nonetheless,
substantial government support of agriculture remains.
A more economically efficient farm policy would reflect
contemporary economic conditions, environmental needs, and public
values. Economic efficiency would be served by policies that are
cost-effective and that give farmers greater opportunity to respond
to market signals. Revising government policy to better meet these
objectives would help unleash more of the innovative energy that
has long characterized American agriculture. U.S. agriculture can
successfully compete in a global marketplace that has been freed of
domestic support and barriers to trade. The key findings of this
chapter are:
 Most farmers do not benefit from commodity subsidies.
 Support to agriculture can be provided in many forms
that are potentially less market- distorting than existing
commodity subsidies.

The U.S. Farm Sector Has Evolved
Dramatically Over Time

In the 1930s, farms accounted for a sizable share of U.S.
employment and gross domestic product (GDP), but per capita farm
income was only one-third the per capita income of the remaining
population. Commodity programs were intended to reduce this
disparity by sustaining farm household income, particularly in
the face of adverse changes in agricultural prices. For instance,
in the early 1930s farm household incomes were at the mercy of
year-to-year fluctuations in farm prices. Commodity price
support programs, which provided price floors (minimum prices)
for agricultural producers, effectively insured them against
adverse price swings. Proponents of these programs argued that
they had macroeconomic benefits because they maintained rural
purchasing power in times of general economic weakness. Many of
today's basic Federal farm policies were established in the 1930s,
and at the time, they were reasonably matched to this overall
economic picture. Since that time, however, the U.S. agricultural
industry has evolved dramatically.
As Table 8-1 shows, in the 1930s farm households accounted for 25
percent of the U.S. population and generated approximately 8 percent
of GDP. Today they account for only 1 percent of the population
(25 times lower than in 1930, as a percentage of total population)
and generate approximately 1 percent of GDP. Over the same period,
the rural share of the population has fallen far less
(approximately two times lower than in 1930, as a percentage of
total population), suggesting that rural areas are less dependent
on farming's contribution to the rural economy. Our agricultural
sector is still vital to our country, but due to both growth in
other sectors of the economy and rapid gains in agricultural
productivity that have lowered the prices of agricultural products,
it has become a smaller share of the U.S. economy.
Astonishing progress in agricultural productivity growth likely
explains much of the structural change in U.S. agriculture
(Chart 8-1). Growth in agricultural total factor productivity
averaged 2.1 percent annually between 1950 and 2002. In comparison,
productivity growth in private nonfarm business over the same
period averaged 1.2 percent annually. Technological progress and
growth in farm productivity permit a smaller labor force to supply
the agricultural needs of the country at ever lower cost. As a
result, agriculture's contribution to total U.S. GDP has declined
over time even though physical production has been rising
(Chart 8-2).

The Average Farm Payment Recipient
Is No Longer Poor

Fifty years ago, average household income for the farm
population was approximately half that of the general population.
Today, however, the average farm household tends to be better off
than the average American household; in 2004, farm households
earned about 35 percent more than the U.S. average household income.
While on average farm households earn more than other Americans,
the relative contribution of farm income (income from farming
activities, including crop, livestock, and other farm-related
income, and government farm support payments) to total farm
operator household income (income from all sources--farm and
nonfarm--that is earned by a household that operates a farm)
varies by farm size. Households operating the "rural residence
farms" (Table 8-2 shows the farm size classifications) earn more
than the U.S. average family income even though their net cash
income from farming is negative (that is, the expenses from
operating the farm exceed the gross revenues) on average. The
income from these farms is unlikely to be sufficient to support
a family, and households operating these farms receive their income
from other sources. Households operating intermediate farms have on
average positive net cash income from their farming operations, but
most household income comes from sources other than farming.
Households operating commercial farms have average household
income over three times higher than the U.S. average family
income in 2004, with most of their income coming from farming.
Production and Government Payments
Are Concentrated on Large Farms
The structure of farming continues to move toward fewer, larger
operations producing the bulk of farm commodities, complemented
by a growing number of smaller farms earning most of their income
from off-farm sources. As Table 8-3 shows, most farms in the United
States are still small farms or "rural residence farms," but they
produce only a small share of total agricultural output and
receive only a small share of direct agricultural subsidy
payments. Most production and government payments are now
associated with intermediate and commercial farms, particularly
the latter, which account for a relatively small percentage of
the total number of U.S. farms but receive over half of direct
payments.

The United States is not the only country in which subsidy
payments are concentrated among a relatively small portion of
farms receiving commodity subsidy payments. Data on the
distribution of payments by farm size are relatively hard to come
by for most European Union (EU) countries. However, in 2001 in
France, farms of approximately 500 acres or more represented
2 percent of farms and received 11 percent of direct payments
for arable crops (grains and oilseeds), while small farms (25
to 50 acres) represented 19 percent of farms but received 7
percent of direct payments for arable crops. While the EU is
currently in the process of converting most of its various forms
of direct farm payments into "single farm payments" that will be
largely independent of production, the direct farm payments will
be based on payments historically received by a farm. Hence, it is
likely that direct payments to European farmers will remain
concentrated among a relatively small portion of farms.
Issues in Current U.S. Farm Policy  In the United States, producers
of bulk commodities, such as cash grains (wheat, rice, and corn),
cotton, oilseeds, and peanuts, and producers of several other
minor crops are eligible for commodity support in various forms,
including fixed direct payments, countercyclical payments, and
marketing loan program benefits (whose particulars will be
discussed in a later section). Dairy, sugar, and (until 2004)
tobacco prices are also supported through
production and import control programs.


Agricultural Production and Farm Program Benefits
Are Increasingly Concentrated
Because of differences in farm size and types of commodities
produced across farms, the distribution of government payments is
unbalanced. Among the factors affecting the allocation of
government payments are farm size (acreage), location, and types
of commodities produced.
Less than half of the Nation's 2.1 million farms receive
government payments--only 40 percent received government payments
(including income support and conservation payments) in 2003.
Direct government payments on crops eligible for commodity support
reach only about 500,000 farms (around 25 percent of all farms).
Even for farms that receive payments, government payments typically
represent a small share of gross farm income (revenue from farming
activities, including crop, livestock, and other farm-related
income, and government farm support payments) and an even smaller
share of farm operator household income. Government payments
accounted for only about 5 percent of receipts for commercial
farms (Table 8-2).
Most program payments go to larger farms, because program
commodity production is concentrated on larger farms. While
commercial farms received approximately half of government
payments in 2003, they accounted for only 15.5 percent of farms
receiving payments, and the average household income of their
operator is almost three times higher than U.S. average household
income. The largest of the commercial family farms (those with
gross annual sales of $500,000 or more) received 27 percent of
payments even though they account for 5.5 percent of farms
receiving payments. Some of the largest farms in terms of value of
production produce livestock or fruits and vegetables and thus may
not receive any government program payments. As Charts 8-3 and 8-4
show, both production and program payments have become
increasingly concentrated over time, with notable shifts toward
larger farms even over the last decade.



The share of program participants is highest in regions where
production of corn, oilseeds, wheat, rice, and cotton is
concentrated. Cotton and rice farms reported the highest average
payment level.  In 2003, cash grain (wheat, rice, corn, barley,
oats, and sorghum) and soybean farms received 49 percent of total
payments even though they represented only 21 percent of the value
of total agricultural commodity sales. Farms that receive no
payments typically specialize in the production of nonprogram
commodities such as meats, vegetables, fruits, and nursery
products.Farmers Today Have Many Options for Managing the
Risks They Face   Farmers face many risks. The uncertainties
of weather, crop yields, prices, government policies, global markets,
and other factors can cause wide swings in farm income. Furthermore,
farm income is more variable than income from off-farm activities.
Risk management involves choosing among many options for
reducing the financial effects of such uncertainties.  In addition
to participating in government commodity programs that are
available for certain commodities, farmers today have private
options for managing risk that were not available when commodity
price support programs were introduced. For instance, the growth
of futures and options markets provides a market-based method for
farmers to protect themselves against short-term price declines.
Other private means to stabilize farm incomes include saving,
borrowing, diversifying among different types of crops and
livestock, contracting farm output with processors at assured
prices, crop insurance and total revenue insurance, utilizing a
wide range of farm management practices that reduce crop loss
(e.g., irrigation, pesticide use), leasing out farmland, and
taking advantage of expanded opportunities for earning nonfarm
income.
The sources of income for farm households are increasingly
diversified, which means many of them are less vulnerable to the
volatilities of farm income. By 2000, 93 percent of farm households
earned off-farm income, including off-farm wages, salaries,
business income, investments, and Social Security. Off-farm work
has played a key role in raising farm household income, which, as
already noted, now exceeds the national average. Chart
8-5 shows the increasing importance of nonfarm income for farm
households in the United States.
While farm household incomes have become more diversified,
farm operations have become increasingly specialized: In 1900, a
farm produced an average of about five commodities; by 2000, this
average had fallen to about one per farm. This change reflects not
only the production and marketing efficiencies gained by
concentration on fewer commodities, but also the effects of farm
price and income policies that have reduced the risk of depending
on returns from only one crop or just a few crops. Farms would
likely cope with decreases in commodity subsidies by increasing the
number of different commodities they produce and by the other
income stabilizing strategies already discussed.

Economic Costs of Commodity Support Programs Despite the
decreasing share of agriculture in U.S. GDP, the
decreasing share of farm income in total farm household income,
and despite the fact that the average farm household is no longer
poor, U.S. farmers continue to receive billions of dollars in
subsidy payments from U.S. taxpayers every year (Chart 8-6). Total
payments to farmers from the Federal government were approximately
$20 billion in 2005 and are projected to be approximately $21
billion in 2006. This constitutes about 6 percent of the U.S.
Federal budget deficit for 2005 of $319 billion.
In addition, these subsidy payments can cause market distortions
by stimulating more production than would occur without the
subsidies. To the extent that payments are tied to production and
prices, they send market signals to farmers that differ from those
they would receive from a market operating free from government
intervention. These distorted price signals lead to an
economically inefficient allocation of resources both within the
agricultural sector and across other sectors of the economy. The
link between agricultural support payments and markets varies among
programs. For instance, fixed direct payments (FDPs) are based on a
farm's historic production and are fixed lump-sum payments.
Countercyclical payments (CCPs) are based on historic production
but the per acre payment varies with changes in the current market
price. Marketing loan benefits (MLBs) are calculated based on
current production and prices. Although there is some debate over
the relative levels of the market distortions caused by these
direct payments, FDPs are generally believed to be minimally
market-distorting per dollar of expenditure, followed by CCPs, and
finally MLBs, which are generally perceived to result in the most
market distortion per dollar of expenditure.
While these domestic support policies increase costs to
taxpayers, they are only part of the support that agriculture
receives and these other forms of support can also cause market
distortions. In particular, for some commodities, market price
supports such as tariffs impose additional costs on U.S.
consumers of commodities by raising their domestic prices relative
to world prices and thus reducing consumer purchasing power. Such
support is especially high as a percentage of the value of the
commodity in the case of sugar. Because of the U.S. tariff rate
quota system on sugar imports, the domestic price of sugar
has been approximately double world sugar price over the last few
years. An estimate by the OECD found that the cost of U.S. sugar
policies to U.S. sugar consumers due to increased sugar prices was
$1.5 billion in 2004.


In general, U.S. commodity support programs promote overproduction
of commodities in the United States and hurt countries that could
benefit from exporting these commodities to the United States. The
existence of these U.S. programs in turn has prompted some U.S.
trading partners to insist that we reduce these market-distorting
programs in exchange for concessions important to United States
trade in services and manufacturing. At the same time, as discussed
in the next section, U.S. agriculture increasingly depends on the
availability of foreign markets.
This section focused on distortions of market for land-based food
resources. For an example of government policy that increases
economic efficiency through market-based management of marine food
resources, see Box 8-3 at the end of this chapter.

Trade Policy Issues
The potential economic gains from further trade liberalization
in agriculture as well as in manufactured goods and in services are
large (see Chapter 7, The History and Future of International Trade,
for more information). Trade ministers are working at the World
Trade Organization to resolve differences about how to reform
various protections for agriculture, a key issue that must be
addressed before negotiations in other areas can proceed. Areas of
significant policy interest are the economic impacts of
agricultural trade liberalization and the potential impact on the
environment and the supply of amenities.
Trade Is Essential to the U.S. Agricultural Sector
Trade is important for all major sectors of the U.S. economy,
and agriculture is no exception. The quantity of agricultural
goods exported from the United States has grown dramatically over
the last half century, and is approximately eight times higher
today than in 1950. With the productivity of U.S. agriculture
growing faster than domestic food and fiber demand, U.S. farmers
and agricultural firms rely heavily on export markets to sustain
prices and revenues. U.S. export revenues have accounted for 20-30
percent of U.S. farm income during the last 30 years and are
projected to remain at this level.
Nonsubsidized Commodities Now Account for Most
of U.S. Agricultural Exports  Historically, bulk commodities--wheat,
rice, coarse grains, oilseeds, cotton, and tobacco--accounted for
most of U.S. agricultural exports. Because of a cost advantage
due to favorable land resources and capital-to-labor ratios, the
United States is comparatively better at producing these crops than many other
countries. The adoption of biotechnology and consolidation of farm
operations have further boosted productivity. Stagnant import
demand in some major markets, however, has resulted in a shift in
U.S. exports of grains and oilseeds. Over the last decade, the
share of U.S. bulk commodity exports shipped to developed countries
dropped from 43 to 34 percent. Fast-growing developing countries
are the prospective future markets for U.S. bulk crops and other
farm exports. China, for example, is now the largest importer of
U.S. soybeans, having surpassed the EU.
In the 1990s, U.S. exports of high-value products--meats,
poultry, live animals, meals, oils, fruits, vegetables, and
beverages--showed steady growth, while exports of bulk
commodities tended to fluctuate more widely, particularly in
response to changes in global supplies and prices (Chart 8-7).
As population and incomes rose worldwide in the 1990s, U.S.
exports of high-value products (HVPs) expanded in response to
demand for greater diversification of diets. In fiscal 1991,
HVP exports exceeded exports of bulk products for the first time
(in terms of value). Notwithstanding that producers of HVPs receive
little in the way of commodity subsidy payments compared to
producers of bulk commodities, HVP exports have continued to
exceed bulk exports, regardless of overall growth of U.S.
agricultural trade.


Trade Agreements Promote Reform of
U.S. Commodity Support Programs  The November 2001 declaration
of the World Trade Organization's (WTO) Fourth Ministerial Conference
in Doha, Qatar, provides for negotiation on a range of subjects,
including the reform of agricultural and trade policies among all
149 members. This 2001 declaration was further supported by the
March 2005 ruling of the WTO Dispute Settlement Body against
certain U.S. cotton program subsidies.
The United States has implemented free trade agreements with
several countries, and has negotiated and is currently negotiating
free trade agreements with various additional countries (see
Chapter 7, The History and Future of International Trade, for
further information); all of these agreements call for increases
in market access, both for agriculture and for other goods and
services. As an example of the impact of these types of agreements,
the North American Free Trade Agreement (NAFTA), implemented in
1994, has spurred market integration among businesses and
communities in Canada, Mexico, and the United States, with research
showing that NAFTA boosted agricultural trade substantially above
levels that would have occurred without the agreement. Trade
negotiations provide an opportunity to remove market distortions
and increase market access for U.S. exports including agricultural
exports.Benefits of Agricultural Trade Liberalization  At a global level,
agricultural land and other resources are used most efficiently when
farmers in each country face the same price signals. Prices are the
market's way of indicating how much of each
crop is produced, how it is produced, and where it should be
produced in order to achieve the most efficient production patterns
and the best, least-cost outcomes for consumers. Trade barriers,
export subsidies, and domestic support programs distort the price
signals that farmers receive and limit the potential economic gains
that consumers and producers can obtain from trade. Trade
liberalization that removes or at least lowers these distortions is
motivated by the prospects of economic gains from trade (as in the
example in Box 8-1 on New Zealand's experience with trade
liberalization).
Empirical evidence suggests that global agricultural policy
distortions impose substantial costs on the world economy. One
study finds that agricultural tariffs, domestic subsidies, and
export subsidies could leave world agricultural prices about 12
percent below levels otherwise expected in an intervention-free
market. Because U.S. tariffs, domestic support, and export
subsidies are relatively low compared to some other OECD countries,
most of the benefits for the United States would come from our trade
partners' policy reforms. A new study shows that global reform of
agricultural and food trade policy would provide roughly 60 percent
of the global gains from merchandise (agricultural and manufactured
goods) trade reform--$180 billion of a total of approximately $290
billion (in 2001 dollars) by 2015. Even though agriculture is a
relatively small portion of world output, agriculture is more
protected than other sectors, which accounts for the significant
contribution of agricultural trade liberalization to the benefits
of total trade liberalization.
U.S. agriculture will continue to be competitive if global
agriculture policy distortions are eliminated. According to the
same study, with removal of all global agriculture policy
distortions U.S. farm exports would increase by 12 percent in
volume and the value of U.S. agricultural exports would continue
to exceed the value of farm imports to the United States. With
global agriculture and food reform, average annual agricultural
production growth in the United States would continue to be
positive.
Even though the net gains from removal of domestic supports would
likely be positive, their removal would likely come with some costs.
For example, a portion of domestic support payments are included
in the value of farmland and other farm assets, thereby distorting
their values. These asset values can decrease in sectors where the
subsidies are reduced. However, if the market-distorting subsidies
can be replaced by less-distorting payments--in particular,
payments that are not closely tied to market prices or quantities,
such as lump sum payments--the adverse impacts on farm asset values
should be minimized.

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Box 8-1: New Zealand's Abolition of Agricultural Subsidies
The farming sector in New Zealand now has negligible subsidies.
Historically, assistance to New Zealand farmers was low until the
1970s, when it started to increase dramatically. The support
policies of the seventies and early eighties shielded the rural
economy from adopting efficient practices, increased transaction
costs, and undermined the farm sector's capacity to adjust
successfully to international market demands.
Within a broad package of reforms to New Zealand's economy in
the 1980s, subsidies to agriculture were abolished in 1985. The
reforms had an immediate and widespread effect on agriculture and
the rural economy: farm incomes fell, farm input costs
(particularly fertilizers) increased, farm profitability declined,
the farm debt burden rose, and land values fell. Farmers' problems
were compounded by low international prices for some agricultural
products during the middle and late 1980s and increasing interest
rates. The slower pace of reform for the manufacturing sector and
the ensuing appreciation of the real exchange rate made the
adjustment process of rural households more acute than the
withdrawal of agricultural support would have caused on its own.
Within five years, however, the economy picked up, farm incomes
had fully recovered and fears of a rural collapse never
materialized. Rural population and farm households proved
resourceful in adapting to the changes that swept the sector.
Despite the early problems, few farmers were forced to leave their
land. The rural economy and the agricultural sector as a whole have
become more efficient, and competitive. Farmers have had to become
more responsive to world price signals and have shown that they
are able to explore and develop new niche markets. A research paper
estimated that the annual rate of productivity growth was
approximately 50 percent higher during 1985-1998, compared to that
of 1972-1984. The level of producer support in New Zealand is now
the lowest across member countries of the OECD, domestic and world
prices are aligned, and government payments are only provided for
pest control or relief against climate disasters. Even with low
levels of government support, it is estimated that agriculture
accounted for 7 percent of New Zealand's GDP over 2002-2004
compared to 8 percent over 1983-1985, and with a post-liberalization
high of 9 percent in 2001. Agriculture accounted for 43 percent
of New Zealand's total exports in 2004.
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With the removal of global agriculture policy distortions, U.S.
consumers would face higher prices for those commodities that
currently receive domestic support, such as grains, because their
production would fall. U.S. consumers would face lower prices for
a few products, such as sugar, that are currently protected by
border measures and that will face increased competition from
imports.
The recent study estimates that nearly half of the global income
gains of approximately $290 billion would go to developing
countries. Global reform thus becomes an effective supplement to,
and in some cases a substitute for, less-effective development aid.
Several recent studies conclude that global agricultural trade
reform would reduce rural poverty in developing economies, both
because in the aggregate these countries have a strong comparative
advantage in agriculture and because their agricultural sector is
important for income generation.
Trade liberalization would be particularly beneficial for the
poorest countries, with several studies finding the potential of
trade liberalization for manufactured and agricultural goods to
lift hundreds of millions of people out of poverty. Debt relief
and foreign aid can also help to reduce poverty, but trade is a
far more powerful tool. One study finds that the payoff from
agricultural trade liberalization to developing countries alone
would be $54 billion (in 2001 dollars) by 2015, roughly equal to
the current debt relief proposal of $56 billion. Furthermore,
development aid does not always trickle down to the
underprivileged. Agricultural liberalization is particularly
important because roughly 75 percent of the world's poor live in
rural areas, and because farmers and other low-skilled workers
constitute the vast majority of the poor in developing countries.
An open global market for agricultural goods would lead to
greater crop specialization, increased agricultural exports, and
higher farm incomes in poor countries.


Alternatives to Commodity Subsidies
Support to agriculture can come in many forms, not all of which
are equally market-distorting. For example, some countries
(including the United States) offer fixed payments to farmers,
irrespective of what they produce. Decoupled payments are lump-sum
income transfers to farm operators that do not depend on current
or future production, factor use, or commodity prices. From an
economic perspective, the best way to provide agricultural support
would focus on forms of support that interfere less with market
forces while achieving the desired policy objectives.
The WTO's Uruguay Round Agreement on Agriculture encourages
countries to "decouple" support from the production of specific
commodities by creating a "green box" category for agricultural
support. The main criterion for a support program's eligibility
to be included in the green box is that the program is "not
more than minimally trade-distorting." Unlike the WTO's categories
for support that is more trade-distorting, the green box
is not subject to spending limits. Note that the term "green box"
refers to potential trade-distorting impacts and not to
environmental issues, although environmental programs may be
included in the green box.
Besides including lump sum payments not tied to present or
future prices or output, the green box includes payments
for "doing something," such as conserving the soil. For instance,
support can be shifted from payments based on commodity output
to agri-environmental programs such as the U.S. Environmental
Quality Incentive Program, which has provisions to pay farmers
to adopt environmentally benign management practices. Payments
can also be made for activities that benefit the entire farm
sector. For example, investments in public goods like
infrastructure for rural development (e.g., roads), agricultural
research, market promotion, extension and teaching, as well as
collecting and diffusing agricultural statistics and market
information, are also included in the green box. Government
support for activities that boost agricultural productivity in
the United States relative to that in other countries can help
to increase competitiveness of U.S. agriculture in world markets.
The exemption of these decoupled payments from WTO payment
ceilings provides members of the WTO with the flexibility to
transfer income to their agricultural producers, but in a manner
presumed to have minimal potential to distort production and trade.
While green box payments are not currently constrained by global
trade rules, many countries argue that some of them distort
production and trade and that their use should be limited. A recent
study of the U.S. experience with decoupled payments finds that
these payments have improved the well-being of recipient farm
households, enabling them to comfortably increase spending,
savings, investments, and leisure but with minimal distortion of
U.S. agricultural production and trade.


Environmental Aspects of Agricultural Subsidies
In the 1980s, agri-environmental programs began to play a larger
role in Federal farm policies, in part due to greater concern
about environmental damage from agricultural production. While U.S.
agri-environmental policies have long addressed the negative
externalities of agricultural production, agri-environmental
policy in a number of developed country members of the WTO is
increasingly giving attention to the positive by-products of
agriculture. Major US agri-environmental programs can be
categorized as either incentive programs or cross-compliance
mechanisms (see Box 8-2).
Agri-environmental incentive programs can be further categorized
as follows:
 Land retirement programs remove land from crop
production. In exchange for voluntarily retiring land, producers
receive rental or easement payments plus cost sharing and technical
assistance to aid in the establishment of permanent cover on the
land. Economic use of the land is limited under retirement programs
(e.g., the Conservation Reserve Program and the Wetlands Reserve
Program). The bulk of U.S. agri-environmental programs expenditures
fall in this category.
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Box 8-2: Policy Mechanisms for Addressing Agri-environmental
Issues  The United States and many other developed countries utilize a
combination of programs to address agri-environmental issues:
 Voluntary incentive-based programs. Agri-environmental
incentives are payments made to the farmer for the adoption of
environmentally sound practices or to retire environmentally
sensitive land from production. The advantage of incentives is
that they increase the likelihood that farmers will adopt the
desired practices or retire land. The disadvantage of incentives
is the cost to taxpayers. Incentives can also have the effect of
expanding production, so even if the disamenities (negative
by-products of agricultural production) produced by each farm
(or on each field) decrease, more farms (or fields) may now
produce disamenities. For example, a business that would be
unprofitable when subject to a tax may be made profitable through
the payment of an incentive or a subsidy. While a tax may drive a
business out of a competitive industry, an incentive may increase
entry and induce expansion in competitive outputs. Nonetheless,
while economic theory may suggest that taxes are the most
economically efficient instrument to reduce pollution, they have
seldom been used in agri-environmental programs at the Federal
level in the United States. Note too that assessing taxes on the
level of agricultural pollution is difficult due to its nonpoint
source nature (that is, the originating source(s) of agricultural
pollution cannot be easily pinpointed).
 Regulation. Regulatory requirements or standards represent
an involuntary or mandatory approach to improving agri-environmental
performance. Unlike policy choices in which farmer participation is
uncertain, regulations require that all farmers participate. This
feature can be particularly important if the consequences of not
changing practices are drastic or irreversible. On the other hand,
regulatory requirements are a blunt tool and can be the least
flexible of all policy instruments. This regulatory instrument
requires that producers reach a specific environmental goal or
adopt specific practices without regard for cost or environmental
effectiveness, which may vary significantly across farms, but are
seldom known by regulators. Consequently, regulation can be less
flexible and less efficient than economic incentives. Regulatory
requirements are used sparingly in both the United States and the EU.
 Cross-compliance. Cross-compliance requires a basic level
of environmental compliance as a condition for farmer eligibility for
other government programs that farmers may find economically
desirable, such as producer payments. Technically, cross-compliance
is a voluntary instrument, but in practice it may not strictly be
perceived by farmers as voluntary, particularly when the existing
subsidy represents an important share of total farm income. Namely,
it may be difficult for a farmer to forgo cross-compliance when the
value of the existing subsidies exceeds the farmer's costs of
adopting the mandated practices. An advantage of cross-compliance
programs is that less government spending is required than with
subsidies to address environmental problems. Disadvantages are that
it will have a lesser impact on farms that are not traditional
participants in commodity payment programs or in situations when
program payments are lower than the costs to farmers of complying.
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 Working land conservation programs support adoption and
maintenance of land management and structural conservation
practices on agricultural land, including crop and grazing land,
and in some cases, forestland, in exchange for cost-shares or
incentives (e.g., the Conservation Security Program and the
Environmental Quality Incentive Program).
 Agricultural land preservation programs help retain land
in agricultural production by purchasing the landowner's right to
convert land to other uses (e.g., the Farm and Ranch Land
Protection Program).
A requirement for agri-environment programs to be included in
the WTO green box is that they have not more than "minimally"
trade-distorting effects. With the exception of the Conservation
Reserve Program (CRP) and other land retirement programs that
likely reduce U.S. production, current U.S. cost-sharing, incentive
payment, and technical assistance programs have a minimal
effect on production, given that the focus of such programs is
on environmental improvements rather than altering production.
In contrast, the focus of complaints brought before the WTO to date
on agricultural subsidy programs has been on programs that may have
a tendency to increase production, not reduce it.
If new WTO negotiations produce an agreement to further reduce
trade-distorting domestic support, countries may find it necessary
to shift support from programs that are subject to reduction to
programs that are exempt. This may include agri-environmental
programs that qualify for inclusion in the WTO green box.
Nonetheless, great care needs to be taken in designing programs to
ensure that they indeed have only minimal trade-distorting effects
(in particular, production-increasing impacts tend to be a source
of international contention); there is no reason to assume that
environmental programs will automatically fall in the WTO green box.
Conclusion  While the income of farm operator households is higher
than the U.S. average, their household income is more variable than
that of the average U.S. household because farm income is more variable
than income from off-farm sources. Management of the risks faced
by large commercial farms--who receive the biggest share of U.S.
subsidy payments--may be best served by crop or revenue insurance
and forward pricing through participation in futures and options
markets. And if one of society's goals for agricultural subsidies
is to support the nonmarket benefits of agriculture, then there
are more efficient instruments than those that are coupled to
commodity production.
If the intent of commodity support programs is to assist
low-income households, then these programs are failing in this
task today because the bulk of payments go to farm households with
incomes above the U.S. nonfarm average. Furthermore, as world
trade in agricultural products increases, food security for U.S.
consumers becomes less dependent on domestic production and,
consequently, on domestic commodity subsidies programs. Not only
are domestic commodity policies--domestic support, market access,
and export subsidies--not targeting vulnerable populations in the
United States, these policies, as used by the United States and
other countries, reduce farm income in poor countries.

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Box 8-3: A Market-Based Approach to Reduce Overfishing

The Nation's marine fisheries are valuable resources,
contributing $31.5 billion in value added to U.S. GDP,
supporting 82 million recreational fishing trips, and providing
9.5 billion pounds of protein-rich food. Unfortunately, many of
these fisheries suffer from overfishing, excessive harvest
capacity, and low profitability. Limited Access Privileges
(LAPs)-which give individual commercial or recreational
fishermen, cooperatives, or communities the exclusive privilege of
harvesting a share of the total allowable catch-are a market-based
approach to addressing these challenges.
Under traditional management approaches, fishermen compete for a
share of a common resource. This leads to a "race for fish" that
results in short fishing seasons, higher harvesting costs, lower
profits, overcapacity, poor product quality, and environmentally
damaging fishing practices. Traditional approaches often mandate
certain fishing gear, specify short fishing seasons, and impose
other restrictions to limit overfishing. These restrictions are
difficult to enforce, do not provide incentives for fishermen to
reduce their catch, and impede the development of innovative
technology and fishing practices.
LAP programs, which include individual fishing quotas (IFQs)
as well as allocations to fishing cooperatives, communities, and
potentially, recreational fishermen, do not suffer from these same
problems. LAPs with transferable quotas provide fishermen with
the incentive to harvest fish at minimal cost, thereby reducing
fleet overcapacity and increasing profitability. Each fisherman
in a LAP program cannot harvest more fish than his individual
quota permits. This means that fishermen can adopt new fishing
practices to reduce bycatch (i.e., unwanted or unintentional
catch) without concern that they will lose target catch to
competitors, and have a lot more choice about when to fish,
allowing them to avoid hazardous weather and sea conditions and
improve their profitability by fishing when prices are best.
LAPs have been implemented in eight U.S. fisheries since 1990.
Commercial fishermen in these fisheries have seen increased
profits, decreased harvesting costs, and a safer and more stable
industry. For example, due to improved product quality under a
LAP program, the Alaska pollock catcher/processor cooperative fleet
harvest in 2001 yielded 49 percent more products per pound than
in 1998, the last year of the "race for fish." IFQs in the Alaska
halibut and sablefish fishery ended the race for fish and increased
season length from less than 5 days to 245 days per year. Profits
have increased due to lower operating costs and higher product
prices, which have more than doubled because halibut now arrive to
market fresh rather than frozen, thereby benefiting consumers.
Harvesting costs in the mid-Atlantic surf clam and ocean quahog
fishery have fallen by 46 percent since implementation of an IFQ
system.
In September 2005, the President proposed legislation
reauthorizing the Magnuson-Stevens Fishery Conservation and
Management Act that would implement key elements of the President's
2004 Ocean Action Plan, including encouragement for fishery
managers to use market-based management, such as LAPs. At the same
time, the Administration pledged to work with regional fishery
management councils to double the number of LAP programs by 2010,
bringing at least eight new fisheries under market-based
management. The Administration is also working with regional
fishery managers to create guidelines for planning and
implementation of future LAP programs.
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